Pragmatic Capitalism

Capital for Living a More Practical Life

Today’s FOMC Meeting: A Step Towards Elastic Deficit Targeting….

Lots of people are talking about how today’s change in FOMC guidance is a move towards NGDP Targeting.  They might be right.  And while I don’t think NGDP Targeting is all bad, it’s definitely not my preferred approach.  I’ve recently started to discuss something called “elastic deficit targeting”.  I explained it briefly here:

“What I did here is sort of like Mike’s TC Rule. I’ve always used 2 for Okun’s law, but maybe that’s not as precise as you like.

I also didn’t target inflation in here. I am just using nominal GDP. No population adjustment either. Just a flat NGDP calculation using the unrate:

(unrate-unrate_target) * [(0.01*current_NGDP)*2] = $1.184T

If we wanted to put this into policy form you take it on a quarterly basis and slap a name like “elastic deficit targeting” on it. Let the Congress vote on it each quarter via specific tax cutting policy. Bam. Let the Fed mesh their policies with it. I rather like the Fed’s current stance of remaining accommodative until “at least” 2015. Let congress work with that. How can we not pass something like this? It seems like a win win.”

Mike Sankowski’s TC Rule is essentially a form of elastic deficit targeting.  My calculations are a bit different than Mike’s but similar thinking.

But the funny thing to me is that we probably have to go through another monetarist economic experiment before we would ever actually get something like this going.  In other words, the Fed goes on a 15 year experiment with NGDP Targeting, we find out it doesn’t work quite as well as some might expect and then we all agree we like lower taxes, attach an elastic policy measure to tax cuts and implement a full bore elastic deficit targeting program.  Of course, we have to let the experiment with NGDP Targeting play out first.  We’ll get to the fiscal targeting.  Just don’t hold your breath.

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